Winding up a company is the process of putting an end to a business by managing its assets for the benefit of its creditors and shareholders. A company is a corporate body, which is an organization of individuals with the shared goal of operating a business and making money. The Companies Act of 2013 mandates that a company be incorporated and registered. “A corporation which is an artificial being, invisible, intangible and exists only in contemplation of law,” according to Chief Justice Marshall, is what constitutes a company. A company may be wound up through compulsory winding up. (Sec. 272) as well as liquidation under the Insolvency and Bankruptcy Code, 2016.
What are the Grounds for Winding-up of a Company?
Following section 271, the Tribunal may, upon a petition filed with it under section 272, order the winding up of a company for any of the following reasons:
Specific Resolution
A winding-up order may be issued by the Tribunal in cases when a company has passed a specific resolution directing the Tribunal to handle its winding-up. Any reason whatever may lead to the resolution’s passage. The winding up cannot be ordered by the tribunal if it determines that doing so would be against the public interest or the interests of the corporation as a whole.
Section 271(2) of the Company Law
A creditor to whom the firm owes more than one lakh rupees will consider the company incapable of paying its debt if the creditor has issued the company with a demand for payment and the company has not fulfilled the creditor’s demands for three weeks. That the debt be paid off right away is crucial: Paying a debt without good reason is considered negligence when it comes to on-demand payments. It won’t be considered negligent if anything is just left out. There is also no neglect to pay in cases where a debt is legitimately contested. Debt repayment is equivalent to not being able to pay public deposits on time. Declared dividends constitute obligations of the company, and in the event that the firm is unable to pay the dividend, the shareholder may also request that the company be liquidated.
Decree
If a tribunal’s or court’s decree or order, upon execution, remains unfulfilled in favor of one of the company’s creditors.
Insolvency in Commerce
The Tribunal has been satisfied with the proof displaying the enterprise’s incapability to pay its money owed. This shows the enterprise’s commercial insolvency, that is revealed with the aid of its stability sheet and occurs whilst a business enterprise’s assets are insufficient to cowl its modern-day liabilities. The company may have more assets than obligations, so just because it is losing money doesn’t necessarily indicate it can’t pay its bills. All contingent and potential liabilities shall be considered liabilities for this purpose. If the applicant can demonstrate the business’s insolvency, the firm may be wound up even if the debt mentioned in the petition is legitimately contested. Non-payment of a legitimately contested claim, however, does not indicate insolvency.
Just and Equitable Grounds for Winding up
- Minority oppression: The Tribunal may mandate the company’s wound-up if the individuals in charge misuse their authority to the point where it gravely jeopardizes the interests of minority shareholders.
- Deadlock in the management: The company may be ordered to be wound up if there is a total impasse in the management of the business.
- Substratum loss: The “substratum of the company” is lost when the goals for which it was established have either failed or are now significantly impractical to pursue.
- Setbacks. A firm may be wound up by an order of the Tribunal on just and equitable grounds if its operations can only be conducted at a loss. The winding-up order cannot, however, be justified based on certain shareholders’ mere fear that the business won’t be able to turn a profit.
- Fraudulent object: Should the company’s operations or goals be fraudulent, unlawful, or have turned unlawful due to legal modifications, the Tribunal has the authority to mandate the company’s winding up on fair and reasonable grounds. However, a winding-up order cannot be granted simply because there was fraud in the promotion or a fraudulent misrepresentation in the prospectus; instead, the fraud may be waived by the majority of shareholders.
- If the business failed to submit its annual reports or financial statements to the Registrar for the five financial years that immediately preceded it.
- If the business has taken actions that are detrimental to the security of the nation, friendly ties with other countries, public order, morality, decency, or India’s sovereignty and integrity.
- On an application submitted by the Registrar or any other individual designated by the Central Government through notification under this Act, the Tribunal determines that it is appropriate to wind up the company if it is determined that the business was formed for fraudulent and unlawful purposes, that its affairs have been conducted dishonestly, or that those involved in its formation or management have committed fraud, misfeasance, or misconduct in connection with those activities.
- Example: In Re. Yenidje Tobacco Ltd., W and R were the sole directors and shareholders of a private business. They then started to have major disagreements and grew antagonistic against one another. They didn’t even exchange words anymore. It was decided that since there was a total impasse in the company’s management, it would be fair and just to order its winding down.
Who may File the Winding up Petition Against the Company?
An application for the winding up of a company has to be made by way of petition to the Court. A petition may be presented under Section 272 by any of the following persons:
Company
If its members have decided to wind up the company’s affairs by passing a special resolution, the company may petition the Tribunal for an order to that effect. The managing director or the directors are not permitted to file such a petition on their own unless they do so on behalf of the business and with the appropriate authorization from the members present at the general meeting. Section 272(5)
Creditors
Only when (i) it is satisfied that there is a prima facie case for the company’s winding up and (ii) the creditor offers such cost security as the Tribunal deems fair will the Tribunal grant authorization. On a creditor’s petition, the Tribunal may, before issuing a winding up order, inquire as to the wishes of other creditors. The Tribunal may decline to issue a winding-up order if the majority of the creditors in value object and it finds the opposition justified in light of the company’s assets and liabilities.
Contributors
Section 272(3) states that a contributory has the right to file a petition for the winding up of a company even if they have fully paid-up shares, no assets at all, or no surplus assets left over after all liabilities are paid. Additionally, shares for which the contributory is responsible or some of which were originally allotted to him or held by him and registered in his name for at least six months during the eighteen months before the winding up commencement, or have devolved upon him through the death of a former holder, may also be presented by a contributory.
Conclusion
In order to close the company entirely it is important to complete the winding up process of the company as per the company law of India. Without completing the formalities of the winding up process of the company a company cannot be dissolved. This process can either be initiated by the company itself or by the creditors of the company. In order to properly dissolve your company you must take help of an expert professional who can assist you in the company winding up process.
FAQs
What do you mean by winding up a company?
Dissolution of a company with the process of law is called winding up of a company in India.
Who Can file Petitions for winding up of a company?
Creditors as well as the company itself can file winding of of company petition.
Can the company’s creditor file a winding up petition against the company?
Yes, the company’s creditor can file a winding up petition against the company.
Can the company itself initiate its winding up process?
Yes, the company itself can initiate its winding up process.
Is Startupfino helps in the winding up of the companies?
Yes, Startupfino helps in the winding up of the companies.
